Pub companies: follow-up - Business, Innovation and Skills Committee Contents

Memorandum submitted by the Independent Pub Confederation


  1.  The newly formed Independent Pub Confederation (IPC) welcomes the opportunity to submit written comments as part of the above ongoing inquiry. The component members of IPC submitted evidence to the original inquiry and this short memorandum seeks to build on, rather than repeat their views. It summarises the views of our members on the issues identified in the original Report and the Committee's call for further evidence.

  2.  The IPC is an umbrella body, bringing together all representative bodies and campaign groups representing publicans, consumers and small brewers. Members of the IPC are the Association of Licensed Multiple Retailers, Guild of Master Victuallers, the Fair Pint Campaign, the Federation of Small Businesses, Justice for Licensees, CAMRA, Unite the Union and the Society of Independent Brewers—supported and endorsed by BII and FLVA.

  3.  The original Business and Enterprise Committee Report published in May 2009 was the culmination of an exhaustive inquiry process examining all aspects of public house ownership. It outlined a series of substantive concerns about the relationship between pubcos and their lessees as well as a number of key recommendations for legislative and regulatory intervention in the market in order to address them. These can be grouped into five key areas—the beer and other product ties, the rental valuation model, the issuing and management of leases, dispute resolution and the competitive environment

  4.  The IPC supports and endorses the Committee's key findings and recommendations for action. As the voice of the publican we are uniquely placed to comment on the degree to which recent industry initiatives and developments—the RICS Report, the agreement between BBPA, BII and FLVA and the establishment of PIRRS—adequately address those concerns and recommendations.

  5.  In responding to this call for additional evidence we have therefore focused on whether the Committee's recommendations are still valid, the degrees to which they are addressed by the recent initiatives and we identify which issues remain outstanding. We have concluded by identifying the further steps we believe must be taken to address the Committee's legitimate concerns about the plight of lessees.


  6.  By way of background, the IPC was established in October 2009 following the publication of the Business and Enterprise Select Committee (BESC) Report, the OFT investigation of the CAMRA Super-complaint and ongoing scrutiny of the sector by the Government. The IPC provides a strong and unified voice for the grassroots of the industry and we represent independent publicans, both singleton and multiple operators.

  7.  Between them, the national trade bodies of the IPC represent around 25,000 publicans. Just under half of these businesses will be operated under lease issued by a pub company or other industry landlord. Of these, three quarters will operate with an exclusive purchasing agreement as part of the terms of the lease.[23]

  8.  The formation of the IPC is a direct consequence of the recent industry mediation process, the agenda for which was the BESC Report of May 2009 and its key recommendations. It rapidly became clear that the landlord representatives were unwilling or unable to address all of the matters arising from the Report. Moreover, the Committee's substantive recommendations were explicitly excluded from consideration.

  9.  Whilst all parties to that process were therefore unable to agree on a complete package of measures to address the BESC Report and recommendations, the discussions did demonstrate the very high degree of commonality and accord amongst lessee groups. The mediation process was therefore a catalyst for the establishment of a common position and a broad coalition of support behind it. That culminated in the launch of the IPC and its manifesto on 14 October, a copy of which is attached.

  10.  The IPC continues to endorse the conclusions and key recommendations of the original BESC Report. We believe action is required in all five areas—the beer tie, the rental valuation model, the setting and issuing of rents, the machine tie and the competitive environment. The measures taken recently by BBPA, BII and RICS are only a partial response to the report and we therefore do not believe that they are sufficient to justify a step away from the small number of specific regulatory interventions BESC recommended.


  11.  In direct response to the criticisms of the Institution implicit in the BESC Report, the RICS commissioned an independent Forum, chaired by a senior property lawyer, to review the rental valuation model and make recommendations for its refinement. A number of members of the IPC were invited to give evidence to the Forum over the summer—most notably Fair Pint and the ALMR—and the report was published in October.

  12.  The IPC concurs with much of the analysis put forward by the Forum. The Report is highly critical of the current situation and seems to concur with the Committee that the "status quo is not an option". It states that the current relationship is under "stress", where a lack of transparency and an imbalance of bargaining power results in "difficult and adversarial negotiations" and where efforts to address this are hampered by a lack of "cross industry cooperation". It notes that if this was a situation involving consumers, then the case for government intervention would be overwhelming, and regrets that this is not the case. We support and applaud this observation.

  13.  The Forum sets out a series of recommendations—to be adopted by RICS and others—to address this unacceptable situation. These are summarised briefly below together with commentary by IPC:

    (a) Principles based approach: the report rejects the suggestion that there should be an automatic 50/50 share of the divisible balance between landlord and lessee. It also states that a correct interpretation of the RICS Trade Valuation Guidance should see the tied tenant being financially no worse off than a free of tie tenant. Both of these points were raised by the lessee groups during the mediation process but they were rejected out of hand by landlord representatives. The failure to accept these principles has been a major stumbling block and remains a matter of concern

    (b) Self-Regulation: There should be one code, not many, and it should be objective, with independent redress and review. We agree wholeheartedly with this. The lack of independent redress and sanctions for breaches is a major failing of the current system of voluntary self-regulation and the weakness of it can be seen in the fact that the 2008-09 inquiry was necessary despite the 2004 TISC Report. We have pledged to work with RICS to develop an independent code.

    (c) Transparency: there should be an independent protocol outlining which items are rentalised and which are excluded, an explicit statement of how the rent will be calculated and the treatment of tenants' improvements. There should be minimum standards of information to be presented for rent reviews. These were all things asked for by IPC in the mediation process and which are not adequately delivered in the BBPA's outline agreement; we have, of course, yet to see the proposed revised BBPA Code.

    (d) Operating costs: RICS concurs with BESC that more information can and should be provided to lessees on this vital element of the rental calculation. It notes that the "lack of cross industry cooperation" has hampered the development of the ALMR Benchmarking Survey—a point underlined during the mediation negotiations—and undertakes to work with the Association to expand and refine it.

    (e) Guidance: RICS will review is valuation information paper and the composition of the Trade Related Valuation Group to redress the perception of bias. The IPC has pledged to work with RICS on this and will make available experienced and qualified lessees to sit on the panel and input into the drafting of guidance.

  14.  The Forum's report is a welcome recognition by an independent third party of the problems facing the trade and an endorsement of the solutions put forward by IPC to resolve them. Lessee input into the revised guidance and TRVG will be vital to addressing these matters and we would welcome a commitment from RICS to work on a collaborative basis with lessee representatives, not just with landlord representatives as they have in the past.

  15.  We are somewhat uncertain as to the actual status of the Report. These recommendations are made by an independent Forum and it is not at all clear whether the RICS has agreed to adopt and implement them. We hope that this may be clarified through the evidence session.

  16.  Equally, we are unclear about the BBPA response to RICS. The RICS Report was published the day after the BBPA's Agreement with the BII and FLVA but the Agreement makes no reference to any of the RICS conclusions and in particular the suggestion that industry codes should be abandoned in favour of an independent Code with external redress. We would be very willing to work with BBPA and others to present a joint submission to RICS on the establishment of an independent Code and redress mechanism.

  17.  The key question for the IPC in respect of the RICS Report is whether, when and how its recommendations will be adopted and implemented.


  18.  Following the failure of the pub industry mediation process to reach a satisfactory conclusion, the BBPA announced that it had reached an Agreement with BII and FLVA to review and revise its Framework Code of Practice on the issuing of pub leases. The Agreement sets out the principles which will under-pin a revised Code of Practice but restricts its scope to the rent setting process. A commentary on the Agreement prepared by Fair Pint is attached in the Appendices to this submission (not printed here).

  19.  The revised Code can therefore only address one aspect of the concerns raised by BESC; even the BII and FLVA co-signatories admit that it is not a full and final solution to satisfy lessee concerns. Crucially, the agreement contains no detail on how any new Code will be implemented and enforced. We understand that the revised Code will not be made available until early next year and not be in place until summer 2010.

  20.  Even as a partial solution, the Agreement is inadequate to address the concerns raised by BESC about the rent setting process. It simply enshrines existing common commercial practice and relevant law. As such it represents minimum standards rather than best practice. More importantly, whilst the Agreement—if fully implemented—will go some way towards providing more information for new lessees, it will leave the position of existing ones fundamentally untouched, arguably creating two tiers of lease practice. There is little meaningful or new, and we submit that many of the points included—eg clarifying where machine income sits in the rental model—should have been done following the 2004 TISC inquiry.

  21.  For example, the new proposal to improve transparency through the publication of a shadow profit and loss account was originally proposed by lessees and is simply disclosure of a document which the landlord already has in his possession. We argued for a far higher level of disclosure to meet standard accounting principles and practice. We also suggested that there be some obligation on the landlord to justify the assumptions of turnover and costs used. The absence of these reassuring checks and balances remains a matter of concern and renders the "concession" meaningless.

  22.  A more detailed commentary on the proposed Agreement has been produced by the Fair Pint campaign and is attached at Appendix 2 (not printed here).

  23.  The IPC's biggest area of concern about the BBPA Framework Agreement remains that any Code issuing as a result of it will remain entirely voluntary and unenforceable. We entirely concur with the RICS's analysis of the inadequacies of voluntary self-regulation in the sector and the need for a single Code of Practice, independently established, monitored and enforced with a separate mechanism for redress. We note that this model exists in the domestic property sector and that the RICS has established a Property Standards Board to afford consumers access to independent redress. This model applies to Home Information Pack Providers, Estate Agents, Property Search Agents etc and we believe the same protection and redress should be afforded to tenants and lessees in the pub sector.

  24.  The BBPA Code makes no provision for independent scrutiny and there are no effective sanctions defined. Detailed implementation of the Code's provisions is left to the member companies' discretion and the revision will leave that largely untouched. The adoption of the revised Code will still leave pub companies free to change their individual Code of Practice at a whim, without consultation, or to ignore it altogether. The decision by Greene King to resign its membership of the BBPA shows that the Code is now meaningless as there is no requirement on them to adopt or implement it.

  25.  The BBPA admitted in the Morning Advertiser of 5 November that there will be no sanctions for companies who choose to ignore or pay lip service to the revised Code. A breach of the Code can only be dealt with by expulsion from the BBPA or removal of BII accreditation. Neither of these sanctions will have sufficient commercial impact to act as a check on company behaviour. Moreover, the BII is far from an independent redress mechanism.

  26.  The Code will have no legal status and enforceability unless it becomes part and parcel of the relevant lease. Landlord representatives have refused outright to accept this principle, but if pub company behaviour is to be truly regulated by means of an industry Code of Practice, then the IPC believes it to be imperative that such a Code is enshrined in the lease.

  27.  For the IPC, the key outstanding question in relation to the BBPA Code is not whether the elements are sufficient but whether they will actually be delivered. Can voluntary self-regulation be trusted and can it work? We would have more confidence in this if the TISC Report had not recommended urgent, more effective regulation in 2004. Then, the Committee recommended that the Government should impose a statutory code on the industry "if it did not show signs of accepting and complying with an adequate voluntary code". The pubcos promised in 2004 that they would deliver but the continued weakness of the BBPA proposals in this regard suggest that this recommendation has yet to be recognised and adopted.


  28.  The 2004 TISC and 2009 BESC Reports both expressed concern about the lack of a low cost dispute resolution system. Since the inquiry, much work has been done to pilot a new scheme run by the BII. The Pubs Independent Rent Review Scheme (PIRRS) is in the process of being established and aims to provide a fixed-cost professional arbitration system, with access to independent experts.

  29.  It is too early to say yet whether this will deliver a satisfactory avenue for lessees to resolve rent disputes but it undoubtedly has the potential to do so. The PIRRS Board comprises a number of lessee representatives and national trade bodies to ensure that the scheme is truly impartial, independent and addresses lessee needs. The surveyors who have responded initially to provide services under the proposed scheme include a number of familiar firms. All were asked to disclose conflicts of interest by providing details of those pub owning companies they had worked for in the last three years. Several failed to make the necessary disclosures. This was highlighted to the BII by members of IPC and for the time being the scheme has been withdrawn.

  30.  What is clear, however, is that the PIRRS scheme will only provide dispute resolution in rent review cases; it will not provide a mechanism for resolving general complaints or grievances. The BESC report expressed concern that lessees have few avenues of complaint if they believe that their pubco is acting unfairly or, more pertinently, if the Code of Practice is being breached. Arguably it is this absence of a general dispute resolution mechanism which has fuelled letters to MPs from lessees who have nowhere else to express their concerns.

  31.  Despite the BBPA's evidence to the Committee that they would act as an "intermediary to resolve any misunderstandings" in the Code of Practice, this has not addressed lessee's fundamental concerns. The IPC has received many calls from lessees who feel they have nowhere to turn when their pubco has acted unfairly or where Codes of Practice are ignored or breached. The BBPA refer them to the company concerned and has said it is not a matter for it to address. The BII has begun to offer a service to consider complaints, but there still is no independent mechanism for redress. Lessees have little confidence in either organization and ultimately it appears that neither can effectively moderate the behaviour of the pub companies.

  32.  The establishment of a truly independent statutory code with access for lessees to independent redress along the lines recommended by the RICS, and indeed TISC in 2004, remains the only solution to this conundrum. Properly addressed and implemented the findings of the RICS in its recent report are capable of providing the valuation framework and guidance for RICS members such that the normal system of expert and arbitral determination of rent reviews in the pub sector should work properly and and in a way that would be expected in other commercial sectors.


  33.  The above three initiatives can be seen as a partial response to elements of the BESC Report, but they leave the substantive recommendations of that Report largely untouched. In particular, they fail to even acknowledge the recommendation that the use of product ties should be severely restricted and that these agreements should be scrutinized by the competition authorities. The assumption by pubcos appears to have been that if sufficient progress is made on the other matters, then this will assuage competition concerns about the tie and political concerns about the treatment of tenants.

  34.  The view of the IPC is that these issues are so fundamental to the nature of the relationship that they cannot be simply offset in this way and must be separately considered. Moreover, we would argue that the above proposals are not in and of themselves sufficient to address even the individual recommendations in those areas.

  35.  The following issues raised by the BESC Report remain unaddressed by the above initiatives and remain issues of concern to the IPC:

    (a) Beer Tie: the Committee felt that if the interests of pubcos and their lessees were aligned, then the pubco would sell beer to the lessee at a price which enabled them to remain competitive. The OFT conducted a partial analysis of price, comparing the some aspects of the free trade with tied lessees. This analysis failed to take account of the aggressive prices charged by town centre outlets such as Wetherspoons and others. Even so, it still found that consumers were at least 8p a pint worse off buying in a tied pub. We would be happy to provide additional figures to the Committee on the price differential between tied and non-tied pubs. This reinforces the Committee's conclusions and justifies its recommendation that the tying of beer and other products should be severely limited

    The Committee also suggested that the only way to settle the argument about whether the Tie did confer benefits to the tied tenant or not was to offer all lessees a choice of being tied. This has been taken up by some smaller landlords, but has been rejected by pubco representatives. We therefore have to concur with the assessment that this will require Government intervention and that DBIS should consult on how best to achieve this

    The Beer tie is not mentioned in the BBPA framework Agreement or RICS Report. Political intervention is therefore required to address this recommendation.

    (b) AWP Tie: both the 2004 and 2008-09 inquiries agreed that the pubcos did not add sufficient value to justify their claims to 50% of machine takings and MPs were unconvinced that the benefits of the machine tie should outweigh the income foregone by the tenant. BESC recommended that the AWP tie be removed.

    The BBPA Agreement simply requires companies to make clear where the AWP income sits in the rental model. The suggestion is that it be removed from the divisible balance but that the tie remains in place. The tie allows pubcos to receive royalty payments from preferred suppliers which results in higher than market rents for tied tenants and an additional income stream for the landlord. We agree with BESC and TISC that the tie should be removed. Given that this has been a recommendation since 2004 but no voluntary action has been taken to address it, again, political intervention is required.

    (c) Insurance: in response to BESC concerns about the nature and cost of the insurance provision, the BBPA has proposed that pubcos will price match insurance cover. This is something of a smokescreen as it still forces lessees to go through multiple hoops in order to save money on their insurance. More importantly, the second aspect of the Recommendation in this area is left unaddressed—namely that some insurance policies require the lessee to pay for a benefit to the pubco, in particular to cover them for loss of income from wet rent. We concur with BESC in saying that pubcos should themselves pay to take out insurance against the risks they face.

    (d) UORR Clauses and RPI: the 2004 TISC Report called for an end to the use of UORR clauses. Although the pubcos have agreed that they will not enforce these clauses and will interpret all lease provisions as providing for downward as well as upward review, the fact remains that many thousands of leases still contain these clauses, which could be enforced in the courts if the landlord chose so to do. Should the property change hands, the lessee has no comfort from a side letter which is not binding on successors in title.

    The same applies to RPI clauses. Coupled with regular rent reviews, the use of an RPI clause results in an automated rental accelerator where rent increases regardless of what is happening to earnings. In many cases, RPI clauses have been imposed upon lessees as a "price" for asking for a Code of Practice rent review or for the removal of an UORR clause.

    The continued refusal to remove these clauses once and for all from lease agreements by means of a deed of variation is puzzling but ultimately unacceptable. The BBPA code offers the opportunity for lessees wanting their removal to change to a new agreement and to bear the cost of doing so. There is no guarantee that the new agreement will not be on worse terms. As has already been noted, pubcos have in the past imposed punitive lease terms as the "price" for a requested change.


  36.  In summary, the IPC believes that the steps taken by BBPA, RICS and BII are insufficient to address the Committee's specific concerns about the rental valuation model, the issuing of leases and dispute resolution. All of them require additional strengthening to be considered an adequate and robust response to the Committee's recommendations. In addition, the substantive issues raised by the Committee in respect of product ties and lease clauses remain outstanding.

  37.  What the TISC Report in 2004 teaches us is that once the spotlight of public scrutiny has been removed, then the threat of regulatory intervention weakens and there is no imperative to act. Warm words and good intentions do not translate into positive or lasting action; for example, we have recently learnt that Enterprise Inn has removed its financial support from distressed lessees, effective after the OFT inquiry reported.

  38.  The IPC therefore believes that the Committee's overall conclusion that "the time has now come for government to intervene to ensure a fair and legal framework" remains valid and should be pursued as a matter of urgency.

  39.  We would propose the following series of actions:

    (a) The Government should, with immediate effect, withdraw the Land Agreements Exclusion Order to subject pub agreements to the full scrutiny of competition law. A consultation on this subject was held earlier this Autumn and the IPC's submission to it is attached

    (b) The OFT inquiry failed to consider the competition implications on business to business agreements and the Government should either negotiate serious undertakings in lieu of a reference on the following matters with the pubcos, or refer the matter forthwith to the Competition Commission

    (c) The Government should proceed as recommended by the BESC Report to consult on means to offer all tied lessees a choice of whether to be tied for beer or not. In addition, these lessees should be afforded the opportunity to buy one guest beer—supplied by small local brewers—outside of any tying arrangement. This could form an undertaking in lieu of a reference and should only apply to those companies with a market share of more than 1%—to avoid damaging the smaller regional brewers

    (d) Where agreements contain a beer tie, all other forms of tying for wines, spirits and minerals or ancillary should be severely restricted and AWP ties should be abandoned forthwith. This could form an undertaking in lieu of a reference and should only apply to those companies with a market share of more than 1% to avoid damaging the smaller regional brewers

    (e) The Government should consult to extend the terms of the Unfair Contract Terms Regulations to small businesses

    (f) The use of UORR clauses should be outlawed. There was a 2003-04 Government consultation on this subject which set out such an approach but was abandoned following commitments given at the TISC. It should be revisited as a matter of urgency. Undertakings were previously given to your committee by at least one pub owning company that this matter would be addressed by way of the provision of deeds of variation to existing leases and removal of the offending clauses from the draft templates for new leases. This has not to our knowledge been carried out or offered to tenants.

    (g) TISC said that the Government should impose a statutory code on the industry unless it took steps to "accept and comply with an adequate voluntary code". The BESC report noted that these recommendations had not solved the problems of inequality in bargaining power and were inadequate. The BBPA has failed to negotiate an adequate voluntary code and the system of self-regulation has been shown to fail. TISC stated that "the Government should not hesitate to impose a statutory code" in these circumstances. We would suggest that this matter is reviewed in the next Parliament and that a statutory code is imposed if the RICS recommendation for an independent code with access to independent redress is not implemented in full.

    (h) The BESC Report highlighted the very low returns many lessees are making from their business. At present, the rental valuation model makes no provision for lessees time spent in the day-to-day running of the business in the operating costs. Whilst we accept that a full salary should not be included, we nevertheless believe that there is scope for financial recognition of the lessee's time within the model.

  Notwithstanding all of the above actions to be taken, we would strongly urge the Committee to commit to review the situation in the next Parliament. There is clearly a range of measures promised by BBPA, BII and RICS which are to be taken forward on a voluntary basis rather than through government action; but the lessons of TISC suggest that we cannot take those undertakings at face value and it will be vital to maintain political oversight and the pressure for action. A commitment to review and revisit, in line with the TISC recommendation, would greatly assist in that respect, but should be considered in addition to, rather than as a substitute for legislative or regulatory intervention

19 November 2009

23   ALMR Benchmarking Survey 2009 Back

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